Employment situation has become increasingly severe with the unemployment rate rising to a new record.

While exports are showing signs of bottoming out and industrial production declining at a slower pace, business
investment is declining.

As for short-term prospects, there are concerns over the downward pressure on private demands that may be
exerted by severe employment and wage situations and capital market
developments.On the other hand, external condition is expected to improve as the U.S. economy and some
economies in Asia are showing signs of bottoming out.

Policy stance

While taking decisive actions for structural reform, the Government is paying full attention to the prevention of
the economy from falling into a deflationary spiral, and is firmly resolved, in
close cooperation with the Bank of Japan, to emerge from the deflation.

On January 25, the Government made a cabinet decision on the "Structural Reform and Medium-Term Economic and
Fiscal Perspective" which sets out a vision of the economy and society that
Japan should build, and sketches a clear picture of the medium-term economic
and fiscal management, centered on structural reform, that will make this
vision a reality. On the same day, the Government also made a cabinet decision
on the "Fiscal Year 2002 Economic Outlook and Basic Stance for Economic and Fiscal
Management," and submitted the "Draft General Account Budget for Fiscal Year 2002" to the Diet.

The Government is steadily implementing the supplementary budgets for the Fiscal Year 2002 and other
measures, and will endeavour to see an early approval of the "Budget for Fiscal Year 2002" by the Diet.

Detailed explanations

1. Demand trends such as consumption and investment

Personal consumptionis weakening.

Personal consumption, in terms of movements on both the demand and supply sides, is weakening. The weak movement
since the middle of last year has yet to show signs of improvement, as the
increases that were seen in some businesses and expenditure items in recent
months began to decrease again. Behind this are the facts that income continues
to decrease and consumer confidence remains at a low level.

Looking at the Family Income and Expenditure Survey, which is a demand-side indicator, real consumption expenses
decreased as a whole due to decreases in spending on automobiles and
housing-related items, posting a sharp month-to-month fall in December, 2001.
The Synthetic Consumption Index posted a slight rise over three months before.

Sales are weaking as a whole. Retail sales and chain store sales still have a weak tone. Department store
sales decreased from a year earlier in reaction to strong performance in the
previous month thanks to brisk sales of winter clothing and earlier
implementation of year-end gift sales campaigns. New car sales increased over a
year earlier thanks to year-to-year increases in sales of subcompact and mini
cars due to the effect of new models. Home appliance sales continued to be weak
due in part to a continued decrease in personal computer sales. Domestic travel
increased slightly over a year earlier but overseas travel posted a sharp
decrease due in part to the effects of the terrorist attacks in the United States.

As for the movement of household income, which has a large impact on the movement of personal consumption,
contractual cash earnings (total of scheduled and overtime earnings) continued
to be smaller than a year earlier. Cash earnings continued to decrease from a
year earlier. Winter bonus payments decreased sharply from a year earlier.

Consumer confidence remains severe after deteriorating sharply.

Business investment is decreasing.

Business investment has been decreasing since the beginning of 2001 due partly to a slowdown in production
and a decline in corporate earnings. Financial Statements Statistics of
Corporations by Industry, Quarterly, which is a demand-side indicator, shows
that business investment decreased in the April-June quarter and the
July-September quarter. Shipment of capital goods, which is a supply-side
indicator of machinery equipment investment, has been decreasing since the
beginning of 2001. Software investment has been on an upward trend.

Business investment is likely to continue its decrease, as business investment in fiscal 2001, both in the
manufacturing and non-manufacturing industries, is expected to decrease in the
Bank of Japan short-term business sentiment survey (tankan) and machinery
orders, a leading indicator of machinery equipment investment, has remained on
a decreasing trend since the January-March quarter of 2001 and is expected to
have posted a decrease in the January-March quarter of 2002.

Housing investment remains broadly flat.

Housing construction moved at an annual rate of 1.15~1.20 million units throughout 2001 because condominium
starts, which posted a solid gain in 2000, have turned steady and because
starts of publicly financed owned houses decreased sharply in and after January
2001. As a result, housing construction in 2001 decreased 4.6% from a year
earlier to 1.174 million units, the first fall below 1.2 million units in three years.

Behind this lies the fact that consumer sentiment with regard to acquiring houses has been declining due to
the severe employment and income environments and a long-term downward trend of
real estate prices that has weakened replacement demand.

Factors that decrease housing construction are still observed. For example, the number of applications for
housing financing to the Housing Loan Corporation has fallen.

Public investment has been generally sluggish.

Public investment has been generally sluggish. Looking at the second supplementary budget for fiscal 2001,
the government's public investment-related budget for the year decreased
sharply from the previous year. However, the government intends to provide
non-interest bearing loans of a total of 2.5 trillion yen, 1.5 trillion yen for
public works projects and 1 trillion yen for facility expenses, by implementing
special measures for "Reform-Promotion Public Investment" that makes
the most of the government's funds without easily resorting to an additional
issuance of government bonds under the policy of restraining "government
bond issuance to less than 30 trillion yen."If the special measures and
facility expenses are included, the government's public investment-related
budget comes is close to the same amount as in the previous fiscal year, but local
governments have continued to curb investment expenses because of their tight
financial positions.

Reflecting the situation, the contracted amount of public works in the October-December quarter continued to
be lower for the 11th consecutive quarter, with orders received by
50 major companies posting a year-on-year decrease for four consecutive
quarters. The magnitude of the decline, which had shrunk in the January-March
and April-June quarters, expanded again in the October-December quarter.

In view of the decreasing trend of local governments' investment expenses, public investment is likely to
continue to post a year-on-year decrease in the January-March quarter.

Exports show signs of stopping decreasing. Imports are decreasing at
a slower pace. The surplus in the trade and services balance has increased slightly.

Exports show signs of stopping decreasing, as exports of electrical devices and general machinery narrowed the
magnitude of decline thanks to progress in IT-related inventory adjustment
worldwide. Exports to the U.S. and Asia remained almost unchanged. The increase
in automobile exports to the U.S. is expected to be temporary, as it has been
brought about by sales promotional campaigns of zero-interest rates on
automobile loans launched by carmakers. Exports to the EU have continued
decreasing.As for the outlook for
exports, the yen's recent weakness and the signs of bottoming out of the U.S.
and Asian economies are likely to support Japanese exports, although the
slowdown of the European economies is continuing.

The margin of decline in imports has narrowed despite weak domestic demand and the yen's weakness. Behind this
are the facts that imports of machinery equipment have begun to stop decreasing
thanks to progress in IT-related inventory adjustment in Japan and that imports
of foods and textile products from China have increased. But, the increase in
imports from China may be temporary. By region, imports from the EU have
increased. Imports from Asia have remained broadly flat, although imports from
China have been increasing. Imports from the U.S., especially of machinery
equipment, have decreased.

Looking at the international balance of payments, the surplus in the trade and services account has
increased slightly, thanks to the combined effects of a slower decrease in
import volume, lower import value caused by a decline in crude oil prices, and
a decrease in service account deficits as a result of a decline in the number of travelers overseas.

2. Corporate activities and employment

Industrial production has decreased at a slower pace but the inventory/shipment ratio has
remained at a high level.

Industrial production, which had posted a sharp decrease since the beginning of 2001, has narrowed the margin of
its decrease, posting a quarter-to-quarter decrease of 2.3% in the
October-December quarter. The contribution of IT-related items to the decrease
in industrial production has declined due to progress in inventory adjustment of IT-related items, especially of producer goods.

There is concern over the prospects of industrial production as the inventory/shipments ratio remains at
a high level and business investment is expected to continue declining,
although production may stop decreasing in view of the bottoming out in exports
and a rundown in inventory. Incidentally, according to the Survey of Production
Forecast, industrial production is expected to rise in January and February.

Tertiary industry activities are decreasing in recent months.

Corporate profits have decreased sharply, especially in the manufacturing sector. Firms'
judgement on current business conditions has deteriorated further. The
number of bankrupt companies remains at a high level.

According to the Quarterly Survey
of Corporate Enterprises, corporate profits as a whole have hit a ceiling
partly due to a slower decrease in personnel expenses since the beginning of
2001 and partly to a smaller increase in sales, although they had been
improving since 1999. Manufacturing industries, especially electric machinery,
posted a sharp decrease in profits in the July-September quarter as sales also
decreased. According to the Bank of Japan short-term business sentiment survey
(tankan), industries as a whole, and the manufacturing industries in
particular, are expected to see their profits decline sharply in the second
half of fiscal 2001, as they did in the first half.

The BOJ tankan survey says business sentiment has been deteriorating sharply. The business sentiment of
steel and electric machinery firms in the manufacturing sector and of construction
and wholesale firms in the non-manufacturing sector are particularly severe. As
for future prospects, corporations, in particular small and medium-sized
enterprises, forecast further deterioration of their business.

According to Tokyo Shoko Research, Ltd., 1,532 companies went bankrupt in December, and the total number
of bankrupt companies in the October-December quarter was 5,188. It remains at a high level.

The employment situation has become increasingly severe, with the unemployment rate rising
to an all-time high and the number of job offers, overtime hours worked and wages continuing to weaken.

The unemployment rate in December rose 0.1% over the preceding month to hit an all-time high of 5.6%. As for the
unemployed, the number of involuntary job leavers has exceeded that of
voluntary job leavers since November and is increasing at a faster pace.

The number of new job offers decreased both from the preceding month and from a year earlier. Overtime work
hours in the manufacturing industries, although increasing slightly over the preceding month, remained on a downward trend.

Wages continued edging down, with total cash earnings and contractual cash earnings continuing to decrease from a
year earlier. Special cash earnings, including bonuses, decreased from a year earlier.

Import Prices have been falling on a contractual currency basis but rising on a yen basis reflecting the yen's
recent weakness. Domestic Wholesale Prices have been declining. Recently,
prices have been falling as a whole as prices of Electrical machinery have
decreased, reflecting technological innovation and a slowdown in demand and as
prices of Petroleum & coal products and Chemicals declined, reflecting a
fall in crude oil prices, although prices of Nonferrous metals have been
rising. The Corporate Service Price Index has continued to decline from a year earlier.

Consumer Prices have been declining slightly since the fall of 2000. Although General services remained
flat, Commodities declined due to a fall in the prices of Durable goods.

Taken together, these movements show that the Japanese economy is in a mild deflationary phase in that the
decline in prices is continuing.

Looking at the short-term interest rates, the overnight call rate moved at 0.001-0.002% in January,
reflecting the Bank of Japan's monetary easing policy. Two- and three-month
contracts, which had continued to move at a low level since April, slightly
rose recently ahead of end-March book closing. Long-term interest rates, which
had moved sideways since mid-August, rose slightly in January reflecting a
market view that financial institutions will sell long-term government bonds for position adjustment ahead of end-March book closing.

The stock market, which had moved broadly flat since October, declined in January, with the TOPIX falling below
1,000 points and the Nikkei Stock Average falling below 10,000 yen.

On the exchange market, the yen (interbank spot central rate) moved broadly flat after depreciating to the 134
yen level against the dollar in late January from the 120 yen level in early
November. Against the Euro, the yen (interbank rate as of 17:00) appreciated to
the 114 yen level in late January, after depreciating to the 118 level in early
January from the 107 level in mid-November.

The growth rate of M2+CDs (monthly average balance) has slightly increased recently due partly to a rise
in the growth rate of liquid deposits (December preliminary report: Up 3.4%
over a year earlier). The total amount of loans provided by private financial
institutions (average balance of all loans) has been decreasing on a
year-on-year basis since the fall of 1996. It remains at a low level,
reflecting firms' weak demand for funds and so forth. Interest rates on bank
loans have recently remained broadly flat, after being on a falling trend since
the beginning of last year, reflecting easier monetary policies. The difference
in fund-raising conditions has expanded depending on a corporate borrower's credit rating, etc.

4. Overseas economies

The economy has been slowing in Europe but shows movements of bottoming out in the U.S. and some Asian countries.

Although the economy has been slowing in Europe, there are movements of bottoming out in the U.S. and some Asian countries.

The U.S. economy shows movements of bottoming out. Private consumption shows slight improvement. Housing
investment has been declining. Although business investment continues to
decrease sharply, orders for non-military capital goods and business confidence
show improvement. Production has begun to stop declining thanks to progress in
inventory adjustment in the IT-related sector. Total employment decreased while
employment rose in the service sector. The unemployment rate dropped. Prices
declined slightly due to a fall in energy prices.

In Europe, the German economy is receding. In France and the U.K., the economy is slowing.

In Asia, the pace of economic growth has been slowing in China. Prices are on a downward trend. South Korea's
economy has bottomed out.

As for the international financial situation, the dollar remained on an upward trend, reflecting
increased expectations of an early recovery in the U.S. economy. U.S. stock
prices remained weak, reflecting concerns about future corporate earnings. The
target range of the U.S. Federal-Fund rate, which had been lowered by a total
of 4.75% through rate cuts for 11 times since January 2001, was kept unchanged
at the Federal Open Market Committee meetings on January 29 and 30.

As for the international commodity market, crude oil prices declined slightly, reflecting an increase in
inventory caused by decreasing demand and the warm weather in North America.